Stimulus
A few minutes ago, I watched two top economists, Mark Zandi and John Taylor, debate whether the government's massive fiscal and monetary stimulus was effective on the PBS Newshour. The video will be posted here tomorrow. Wednesday, Zandi and Alan Blinder published a Moody's macro simulation that estimated 8.4 million more jobs and 6.6% of real GDP would have been lost 2010 without either stimulus. Taylor argued that much of the stimulus was ineffective, that the economy revived because of business investment, and that now we are saddled with massive debts which will burden future growth. It's hard for an experienced economist to come to an informed choice between these two positions, so most viewers tonight came away with one conclusion: Economists can't agree on anything, just like our political leaders.
I have been asked a lot recently by Wall Street economists about where Washington fiscal policy is headed. In short, I don't expect much change. We'll stay stuck at around $1 trillion of annual deficits in FY10, FY11, and probably FY12.
It's too early to get our hopes up for sustained Senate bipartisanship, but just before 6 p.m. tonight, five Republicans joined 57 Democrats to invoke cloture on Senator Harry Reid's (D-NV) amendment to the House jobs bill, H.R.2847. Newly elected Scott Brown (R-MA), Kit Bond (R-MO), Sue Collins (R-ME), Olympia Snow (R-ME), and George Voinovitch (R-OH) voted with the Democrats. Ben Nelson (D-NE) was the only Democrat to vote with the Republicans. Not voting were Frank Lautenberg (D-NJ), who is hospitalized for stomach cancer, and eight Republicans, who ducked the vote. So far, Reid's amendment would be limited to $12 b. FY10-FY12, and it's "paid for" over 10 years, but amendments could add to that, and it will grow larger in any compromise with the House's $65 b. FY10-FY19 bill.
I formulated the first first-time homebuyer credit back in 1975 when I was a revenue estimator on the Joint Committee on Taxation. I didn't like the idea then, and I don't like it now. The credit rewards those who would have bought a home anyway, most of whom have higher income than the taxpayers who are paying for it. The taxpayers are mostly renters and get no tax breaks at all. The only justification I can see for the homebuyer credit is that it may accelerate home purchase from next year to this year. The overall number of homes purchased this year and next won't change much. Check out this Urban-Brookings Tax Policy Center analysis, which makes these arguments in more detail. This Congressional Research Service analysis shows how small the economic effect of the homebuyer credit is likely to be (See pages 7 and 8 for the results.).
Thursday, the President's Council of Economic Advisors issued its first quarterly report to Congress on the American Recovery and Reinvestment Act (P.L.111-5). CEA reported that $151.4 b. of the $787 b. authorized had been outlaid as of the end of August and estimated that this increased second quarter real GDP by 2.3% and added about half a million jobs. It estimated third quarter real GDP would rise an additional 2.7% and employment would increase by 1 million. See Table 8 on page 26. If these estimates hold up, which I expect them to, American taxpayers might feel better about where their $787 b. went.
Three years ago, my stepdaughter developed asthma-like symptoms, but that treatment didn't work. She felt good enough to fly back to Atlanta, but had to be carried off the plane. Some of the best pulmonary specialists in the country couldn't figure out what she had until a full-body MRI showed a blood clot in her lung. They gave her blood thinners and fully expected them to work. The next day's MRI revealed several more blood clots. They didn't wait for a better diagnosis, they threw everthing they had at it -- different and much higher dosage intravenous blood thinners and a catheter into her heart to prevent any clots from going beyond. For a day or two, we weren't sure if she was going to survive. She did thanks to brute force methods.
They don't teach brute force policy methods in economics grad school. Professors rarely teach the insufficiency of their theories and applied research. Politicians are more willing to engage in brute force methods in wars and in depressions and in other emergencies, but their instincts to pay back supporters along the way can prove very wasteful and burden future generations.
The Urban-Brookings Tax Policy Center just posted its stimulus report card of the Senate Finance Committee tax cut portion of the Senate stimulus bill. The biggest difference between it and its House counterpart is in patching the Alternative Minimum Tax early this year, which drew a D- for failing to stimulate the economy. The Senate also has exclusion of unemployment benefits from taxation, B-, Broadband incentives, C, and deferral of certain income from the discharge of business indebtedness -- none of which were in the House bill.
The Senate will take up the bill next Monday afternoon with opening statements and begin disposing of hundreds of amendments during the remainder of the week. Democratic leaders hope to defeat most amendments, in which case the bill will probably get final Senate approval by a very narrow margin at the end of the week. If some Republican amendments pass, the possibility exists for additional Republican votes in favor.
Enactment by mid-February seems likely.
Tuesday morning, Congressional Budget Office Director Doug Elmendorf testified before the House Budget Committee with detailed estimates of the impact on the economy of adopting H.R.1, the $819 b. House stimulus bill, which the House passed by 244-188 last night.
Table 4 at the end of the testimony shows CBO's estimates of H.R.1 assuming low and high fiscal policy effectiveness in an attempt to bound the views of leading economists. By the fourth quarter of 2010 under low effectiveness, GDP is estimated to rise 1.2% over baseline, and employment is estimated to rise by 1.3 million jobs. Under high effectiveness, GDP is estimated to rise 3.5% over baseline, and employment is estimated to rise by 3.7 million jobs. That's quite a range, but it reflects the uncertainty over how effective fiscal policy is when credit markets remain impaired.
The Urban-Brookings Tax Policy Center issued a very handy report card yesterday on the stimulus effect of the House version of the American Recovery and Reinvestment Act, H.R.1. They based their grades upon how timely ("bang for the buck") and well targeted they estimated each stimulus proposal would be if enacted. This analysis was prepared by some of the best tax economists and budget experts in Washington. I recommend it to policymakers and to the public as a rare comparison of the relative effectiveness of stimulus policy options.
The Congressional Budget Office just estimated that H.R.1, the House version of the American Recovery and Reinvestment Act of 2009 will add $169.5 b. of deficit/stimulus in FY09 and $356.0 b. in FY10, assuming a mid-February effective date. The total 10-year cost is estimated at $815.9 b., so 64.4% would be spent or reach taxpayers within the first 18 months after enactment. This is better than initial estimates, which showed about 40% going out over the same period. The House plans to pass the bill late Wednesday, and the Senate hopes to follow suit next week.
